Schwab Made Up to $2 Million From Unauthorized Trades

Charles Schwab & Co., the nation’s largest discount securities broker, acknowledged that an internal investigation found that it made as much as $2 million from unauthorized customer trades.

The company said the improper trading has ceased and that it has informed the New York Stock Exchange of the situation.

The Schwab trades came to light in the current issue of Business Week magazine, in which an unidentified employee said the company profited by trading in securities, warrants and rights owned by customers without their permission.

The employee claimed that the practice was sanctioned by the company from 1985 until last month.

Hugo Quackenbush, a Schwab senior vice president, said his firm began its internal investigation into the trades Oct. 6, before the magazine story surfaced.

Quackenbush said the amounts involved were very small, except in a couple of cases. However, he said, over the last four years the firm may have generated between $1 million and $2 million in additional income from these activities, and that should be returned to the customer.

“It’s a murky area. It’s a complex issue how to deal with this. If a guy gets 2 cents on one of these trades, should we spend 39 cents on the postage to let him know?” Quackenbush said.

Often these deals were not viable for individual shareholders, but were profitable for the brokerage.

For example, if a customer with convertible preferred stock asked Schwab to to convert the shares to cash, Schwab sometimes paid the customer cash but converted the preferred to common shares and sold them at a profit.

Quackenbush said there were no customer complaints in this area “because the customers got what they wanted.”